Xebec Adsorption Inc

TSX:XBC

Earnings Call Transcript 2021-Q2

[Brandon Chow, Director of Investor Relations]

Hello, everyone, and welcome to Xebec's Second Quarter 2021 Investor Webinar. My name is Brandon Chow, and I'm the Director of IR at Xebec. I'd like to remind everyone that this webinar is going to be recorded and will be made available in the Investors section of our website later today. Please note that we will open the floor to questions after the conclusion of the presentation. If at any time you have a question, you may type it in the consol on the right of your screen. Joining me today will be our President and Chief Executive Officer, Kurt Sorschak; our Chief Financial Officer, Stephane Archambault; and a new face, our Chief Operating Officer, Jim Furnaces. Our earnings press release was issued earlier today before market open. All relevant documents are available for download either from the Investors section of our website or from SEDAR directly. You will also find later today, a copy of today's slide deck on our website Investors section as well.During this call, we will make forward-looking statements about our future financial performance and other future events, trends, including guidance. These statements are only predictions that are based on what we believe today and actual results may differ materially. These forward-looking statements are subject to risks, uncertainties, assumptions and other factors that could affect our financial results and the performance of our business, which we discuss in detail in our filings, including today's earnings press release. Xebec assumes no obligation to update any forward-looking statements we make on today's call. It may also be referenced to certain non-IFRS measures such as EBITDA, adjusted EBITDA backlog and quote log. These non-IFRS measures are not recognized measures under international financial reporting standards and do not have standardized meanings prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. With this, I turn it over to Kurt.

[Kurt Sorschak, Co]

Thank you, Brandon, and good morning, and welcome, everyone, to Xebec second quarter 2021 investor webinar. I'm happy to be reporting our Q2 results this morning as we continue our transformation into a global renewable gas provider. Our Q2 results show that our growth this year is on track as we continue our strong momentum alongside significant commercial developments. One of those developments is, obviously, the commercial validation of our Biostream system with an initial master service agreement containing an 18 unit order with a leading U.S. dairy developer. As many of you know, we launched the Biostream system last year and are excited to be releasing now the second-generation version of this Biostream distance large dairy RNG developer.In addition, we continue to work through our legacy RNG contracts. Those are those Q4 contracts, and we are clearly seeing a tapering down of the negative impact of these legacy contracts. Biostream is ultimately going to be the driver of our growth in our RNG segment and with its standard design will help mitigate future execution risks. The rest of our verticals in hydrogen, oxygen, nitrogen and our cleantech service network are performing very well and are generating solid EBITDA margins as we continue to work on additional cost manufacturing and sales synergies that should have a positive impact in future quarters.In Q2, we saw several hydrogen announcement in generation and recycling, such as flat glass manufacturing and lubricant recycling in our Turkish facility. In addition, we were successful in signing hydrogen supply agreements with hydrogen refueling stations in the Netherlands, demonstrating that locally produced hydrogen has clear cost advantages over liquefied and long-haul hydrogen supply. As we build out our decentralized production hubs across Europe and North America, we anticipate that hydrogen supply to local hydrogen refueling stations will become a larger part of our growing gas as a service offering. Ultimately, with our hydrogen business, we strive to build a recurring revenue business with 10 to 15 year Gas-as-a-Service contracts.As this once in a lifetime energy transition progresses, we are anticipating increased market demand for our renewable on-site generated assets. And I can say due to already increasing demand that we are seeing today, we have decided to scale up our manufacturing capabilities in Europe and North America. In order to become a meaningful player in this energy transition and to be able to benefit from the opportunities this transition offers, we will need to significantly increase our manufacturing capacity to build the demand for low-carbon energy solutions. We have started production of 30 Biostream units in our Quebec facility, and we are currently looking to meaningfully expand our manufacturing capacities in the U.S. In Germany, we have taken steps to significantly increase production capacity at Inmatec with the goal to double revenues in the next 3 years.As we grow our global manufacturing footprint, we recognize the need to grow the bench strength of our management team. Consequently, in Q2, we brought on very experienced senior operation executives is Jim Vounassis and Mike Munro here in Canada and with Peter Biedenkopf in Germany. We also have taken steps to diversify our Board and have added more sector-specific know how to the Board. With the addition of Ouma Sananikone, who has strong experience in infrastructure and infrastructure financing. Karen Nielsen, who comes from a background in the oil and gas sector, Frank Seguin, who has a strong background in manufacturing. And yesterday, we announced the addition of Brian Levitt, who has a strong background in legal, financial and commercial. I encourage you to check out the profiles of our management team and our Board on our website.Finally, our top line growth remains on track, and our Blainville operation team is working hard to return our RNG business as to profitability. Our SG&A investments are significant, but necessary for us to be able to make the transition from a small manufacturer to a more meaningful manufacturer of renewable and on-site gas systems and solutions. Overall, as I said before, I'm very pleased with our progress, and the second half of 2021 is shaping up to be strong. This year will showcase our continued growth ability as we build the foundation for more growth and the return to profitability in 2022 and beyond. With this, I'll turn it over to Stephane Archambault, our CFO, who will go with the financial highlights. Stephane, please?

[Stephane Dephane Archambault, Chief Financial Officer]

Thank you, Kurt, and welcome, everyone, joining us. Let me start by reviewing our consolidated financial results for Q2 2021. We achieved a record revenues of $32.7 million in the second quarter of 2021 compared to $19.6 million for the same period in 2020, a 67% increase. The increase is mainly explained by acquisitions in 2020 and 2021, including $8 million for service companies and ACS and $16 million for HyGear and Inmatec. This was offset by lower revenues for long-term production type RNG projects. Our gross margin was $5 million for the second quarter of 2021 compared to $4.3 million for the same period in 2020. The gross margin percentage decreased from 22% to 15% is due to working through the company's lower margin RNG projects. In addition, the lower margin for our RNG project is also impacted by larger overhead we're carrying to prepare for a ramp-up in Biostream production.Our research and development expenses were $0.9 million for the second quarter of 2021 and were related to the development of the company's second-generation Biostream product and the continued development of its RNG and hydrogen technologies. Selling and administrative expenses were $12.3 million in the second quarter compared to $4.7 million in the same period in 2020, a 162% increase. The increase is primarily due to additional SG&A expenses associated with the newly acquired companies, $2 million for the service companies and ACS, $3 million for HyGear and Inmatec. In addition, $1.1 million was attributed to transaction and integration expenses related to newly acquired or potential future acquisitions.Finally, SG&A expenses increased due to organizational scale-up of employees, recruitment fees and associated costs to support the increased level of future sales. We had negative adjusted EBITDA at $4.6 million for the second quarter of 2021 compared to negative adjusted EBITDA at 0.1 for the same period in 2020. Net loss for the quarter was $7.5 million or $0.05 per share compared to a net loss of $0.8 million or $0.01 per share for the same period in 2020. We've have $70.2 million of cash as of June 30, 2021. And this amount may be impacted by future financing arrangement, we are currently in negotiation with. This includes a subsequent event of a USD 15 million acquisition line from export development in Canada. Overall, I'm pleased with the quarter we delivered especially on the top line and look forward to seeing the impact of our investment from this quarter as we continue to grow our Biostream business and integrate our acquisitions.Next, I'd like to show you our quarterly financial trend. I really like to show this graph as it helps to put into perspective where things are added in long term. As you can see, the first half of the years, we booked almost as many revenues as we did in the entire 2020, which is quite impressive. As we turn through the legacy RNG contracts, the bottom line will continue to improve and the new investment we're making today will also support higher future revenues in 2022 and beyond. Xebec has an aggressive growth plan, having achieved a 68% revenue CAGR this quarter since Q2 2017, and the outlook remains positive. With this, I'll turn it over to Jim to go over our business segments.

[Dimitrios Vounassis, Chief Operating Officer]

Thank you, Stephane, and good day, everyone. Let me now bring you through the chart of our business segments as we have had several acquisitions over the past few months. Starting from the right, we see that we have 3 main segments and they support each other. The first is our cleantech systems, where RNG, hydrogen, oxygen and nitrogen generation and purification fall under. Note that we are now including Inmatec in this segment, given the nature of its products, which are aimed at reducing the carbon and air emissions and costs of gases through on site generation.Next, we have our cleantech services, which is being executed by our Cleantech Service Network and includes operations, service and overhaul. It also features our roll up strategy, where we've announced several acquisitions since the strategy started in 2019. We aim to service and maintain the equipment we deploy in addition to our competitors as installations are deployed across North America and Europe. This will also support our shift to a more recurring services model over time, which will help improve the predictability and profitability of the overall business. Last, we have our foundational industrial business, which includes gas purification and drying for compressed air and gas applications. We are also developing new hydrogen dryers, which will be deployed at electrolyzer hydrogen generation solutions, leveraging our technology in the hydration.Now let's dive into the Cleantech Systems segment. Our Cleantech Systems segment saw growth over 54% year-over-year, which was mainly attributed to the acquisitions of HyGear and Inmatec. We have now created a broader portfolio of cleantech systems, which is squarely aimed at capturing the growing markets in RNG, hydrogen and oxygen. As Kurt and Stephane mentioned earlier, we continue to work through the legacy RNG contracts, and we expect the impact on our gross margin to taper down in the second half of this year as we move from our manufacturing to our start-up and commissioning phase. We have had some key learnings from the experience that we have carried over into our second-generation Biostream product. The second-generation Biostream is the focus for us in the renewable natural gas arena due to its standardized nature, ease of installation and the efficiencies we gain in manufacturing. This was validated with the 18 unit agreement we signed with the leading U.S. dairy developer. I'd like to note that this agreement is a framework for orders and as purchase orders are submitted within the next year, they will be added to our backlog.Our hydrogen, oxygen and nitrogen businesses continue to perform well, and we're seeing strong growth and gross margin generation from them. We have had several exciting announcements in hydrogen, which Encompass generation, purification and recycling, which I'll cover later on in the presentation. We continue to see more growth opportunities with our decentralized production hubs, which help create local ecosystems for hydrogen supply. As Kurt mentioned, Inmatec continues to sustain its record production level, and we are increasing their production floor space with a new lease. There have been continued orders for medical oxygen as the COVID-19 pandemic continues to show the advantage of local on-site production.Next, I'd like to give us an overview of our new BGX Biostream product. The BGX Biostream is meeting the uptick in demand we've seen for RNG across North America, particularly in the U.S., where according to the American Biogas Council, there are over 8,500 animal manure based projects that can produce biogas and renewable natural gas. Over 80% of these applications fit the flow rate capabilities of our models. What makes Biostream unique is a completely standardized modular design, which allows a starting list price of USD 1.5 million, and a lower operating cost that customers like. We have invested in this product with a dedicated engineering team as well as a dedicated manufacturing line, which has impacted our gross margin in the first half, but feel this is critical in capturing the fast-growing dairy market because of the strong value proposition driven by RNG credits of upwards of USD 115 per MMBtu. Consequently, we are targeting a production rate of 30 to 40 units in our Canadian facility. This represents a multifold increase to the existing run rate we have, and we are also looking for facility in the U.S. for future growth. The U.S. production will allow us to get closer to our customers and adhere to any potential local U.S. manufacturing requirements.On July 22, 2021, U.S. Senators Sherrod Brown and John Thune reintroduced bipartisan legislation to encourage investment in Biodigesters and nutrient recovery systems. Their bill, known as the Agricultural Environmental Stewardship Act provides a 30% investment tax credit to help offset the upfront costs associated with building biodigester systems. If past this legislation, along with other initiatives, are expected to result in an accelerated build-out of U.S. RNG projects. Overall, we are quite excited about Biostream as it represents an extremely large market opportunity on itself, and we have been able to validate the need through our recent market wins. We think there are many farmers and developers who will want the product and are mapping this demand to our increase in production capacity.Next, I'd like to discuss our hydrogen business. Hydrogen continues to be seen as an important pathway in the broader energy transition and decarbonization conversation. We have had several key projects commissioned in Q2 2021, which included a Turkish project for the country's first lubricant recycling plant and has a capacity of 300 kilograms per day of hydrogen. In July, we also shipped another unit to a global German lighting company for tungsten manufacturing located in the Czech Republic, also a 300 per kilogram per day unit. These are new applications for us for on-site generation of hydrogen, which go beyond the traction we've already received from the flat glass manufacturing industry.Furthermore, in the quarter, we signed a second supply agreement with a hydrogen refueling station in the Netherlands. This was good validation of our hub strategy, which will be supplying the station locally with 130,000 kilograms of hydrogen over 1.5 years. Our first supply agreement, which we signed earlier this year with Rijngas, a gas sales and distribution company, the hydrogen there is being sent a refueling station operated by Orange gas and is one of the first in Amsterdam and the 6th in the entire country. As more hydrogen refueling stations come online, we benefit from being the hydrogen purification and dryer supplier in the system. For example, we received a $1.2 million hydrogen PSA order for our refueling station in Poland that will produce over 160 kilograms per hour of hydrogen. Now that's quite a lot of hydrogen. We also deployed our new hydrogen recycling technology and announced a contract with one of the largest flat glass manufacturers in the world. This was signed under gas as a service agreement as well, which is helping fuel our transition to selling hydrogen molecules instead of onetime equipment. There are several benefits to on-site recycling, which include reduced carbon emissions and reduce costs for our customers.Our decentralized hydrogen production hubs will be a key pillar to growth given the localized demand we see in certain regions. We are currently scoping North American partners to build a hub in the country and currently have one under construction in the U.K. with BOC gases and are expanding our existing hub in Arnhem Netherlands because of more demand coming online.Next, let's discuss our fast-growing oxygen and nitrogen businesses. This quarter, we saw a full contribution from Inmatec to our final financials, whereas in Q1, there was only one month's worth of contribution. Inmatec continues to sustain its record production levels, primarily driven by the heightened demand for medical oxygen caused by the COVID-19 pandemic. Like Biostream, we are also increasing production capacity and signed a new lease to double the production floor space on the site. While we are being cognizant of the nature of medical oxygen revenue demand due to COVID, we have found that the pandemic has accelerated the adaptation of more sustainable and cost-effective gas sources. Customers are demanding gas that is readily available, less carbon-intensive and lower cost with on-site generation, the only commercial method of achieving these goals. In order to meet the continued humanitarian needs for medical oxygen, we are also shifting nitrogen generation systems to our facility in the Netherlands to liberate further production resources at Inmatec. We have received orders from many development ignitions, including Yemen, which was funded by the World Health organization. Xebec continues to do its utmost to ensure that lives can be saved around the world with medical oxygen. Furthermore, as mentioned by Kurt, Dr. Peter Biedenkopf started as our General Manager of the division this quarter, and will do a solid job running the division given his industrial experience and background in gases from Linde and other companies. Ultimately, we continue our integration efforts to support future synergies, which include transforming Inmatec Dubai and HyGear's Singapore sales offices to include the full portfolio of Xebec Cleantech Systems.Next, let's look at our support segment. Our support segment, Cleantech Services, which includes industrial products and services, continues to perform well and saw a doubling of revenues this quarter over Q2 last year. This revenue growth was driven by acquisitions of Airflow, Titus, Nortec, Tiger Filtration and organically. We are focusing on integrating these companies successfully and are currently training resources to support the pending ramp-up in the field of biogas and hydrogen systems as we deploy them across North America in the next few years. Several of our subsidiaries saw together $3 million higher revenue in Q2 over Q1. And the first one we've acquired Compressed air International hit a monthly sales record last quarter. All of this work is now being underpinned by our new Cleantech Service Network headquarters, laid us out of Mooresville, North Carolina. Mooresville is a top region for gas expertise, and we signed a new lease for our headquarters there, which includes 2,000 square feet of office space and brought on board several key leaders. We are excited to have Russell and his team hit the ground running, and we expect to continue our acquisitions for this year as we target a $250 million yearly revenue run rate in this segment by 2025.Last, we recently announced the acquisition of Tiger Filtration and Nortec. Nortec provides us with future engineering center of excellence for dehydration products, which includes Air & Gas dryers, RNG dryers and new hydrogen dryers. The 18,500 square foot facility has also allowed us to shift dryer production from our Canadian facility down to Tennessee to make room for the significant Biostream ramp up. Tiger Filtration allowed us to acquire aftermarket consumables manufacturing capabilities. This includes the ability to develop new products for RNG and hydrogen related consumables such as filters and elements. This was a unique opportunity for Xebec to vertically integrate and achieve cost synergies by consolidating our purchases through this entity. I feel very excited about all our teams worldwide, and I think that we are poised to deliver solid performance. Now I'd like to pass it back to Kurt to talk about the overall outlook and management guidance.

[Kurt Sorschak, Co]

Thank you, Jim. That was a good overview, I think, that our investors will appreciate. I'd like to leave you with the last slide, which summarizes our management guidance for 2021. As I mentioned earlier, we are maintaining our revenue guidance of $110 million to $130 million, but we are updating our adjusted EBITDA guidance. The impact of the legacy RNG contract and our decision to significantly invest in our SG&A and manufacturing capacity has pushed the return to positive adjusted EBITDA generation into 2022. Our order backlog for renewable gas equipment remained solid as we transition to more recurring revenues from services parts and molecule sales. These types of revenues are typically not included in our backlog number, but will make up a larger and larger portion of our revenues going forward.As Jim and Stephane mentioned, there are many opportunities that we are working on. And each of those opportunities present a unique growth profile in the broader decarbonization effort as beside climate change. Ultimately, 2021 is on track to be another exciting year, and I expect meaningful improvements in the second half of 2021. Xebec is making sure that the right people are at the right place and that we have the manufacturing capacity and service capabilities where they are needed, as Xebec becomes a more and more diversified and scalable company, this exposure to multiple fast-growing markets for our renewable and lower carbon gases. With that, I'll turn it over to Brandon for the Q&A session.

[Brandon Chow, Director of Investor Relations]

[Operator Instructions] Our first question comes from Aaron.Do you expect the Q3 backlog to be significantly increased due to the Biostream orders?

[Kurt Sorschak, Co]

Jim, you want to take this?

[Dimitrios Vounassis, Chief Operating Officer]

Sure. Yes, as we see our agreement that we signed recently with a Dairy Farm Developer. As we see the purchase orders coming in for the production of these units, we do expect that they will go to our backlog, and they will support the increase in our backlog.

[Kurt Sorschak, Co]

Yes. I might want to add here. If you add those 18 Biostream orders into our backlog, which we have done, our order backlog would be over $100 million.

[Brandon Chow, Director of Investor Relations]

Our next question comes from David Quezada from Raymond James.Do you expect the margin impact of the problematic RNG contracts to be limited to this quarter? Or do you still expect to see the effect on gross margin in the upcoming?

[Kurt Sorschak, Co]

I think we have worked through the majority of the impact. There is still some uncertainty. We still have some installation and commissioning work to be done. But overall, I think, as we said in our presentation, we expect a significantly improved second half of the year.

[Dimitrios Vounassis, Chief Operating Officer]

Yes. I would add that we expect to see a tapering off as we move from the manufacturing phase into basically the startup and commissioning base of these units.

[Brandon Chow, Director of Investor Relations]

We have another follow-up question from David.This question is for you, Jim. David, appreciates that it's still the early days, but he is wondering if you could discuss what you'll be focusing on initially and any changes that you're looking to make within the company?

[Kurt Sorschak, Co]

Certainly, I think the early days focus has been really on increasing capacity for production. We want to make sure that we are poised to capture the growth, and we don't put ourselves in a situation where we are managing the growth of the company through production limitations. At the same time, we are also focusing on talent acquisition. We are out looking for some key talent. We have brought on board talent in terms of operations. And now we're turning our look over to the supply chain side as we want to build a small but highly effective strategic sourcing organization to leverage basically the global spend of our different divisions.

[Brandon Chow, Director of Investor Relations]

Thank you, Jim. Our next question comes from Eric Stine from Craig-Hallum.Can you talk about the M&A pipeline and if there's any change to the market multiples for potential targets?

[Kurt Sorschak, Co]

What we have seen so far is that there is no significant change to the multiples that we are offering for acquiring those companies. And we have a solid pipeline of M&A targets. So it's a matter of matching where we want to buy, and that is a lot dependent as were going to be growing our systems, both hydrogen and RNG because that's where the region's rebuyer support and service product solutions.

[Brandon Chow, Director of Investor Relations]

Thank you, Kurt. Our next question comes from Daniel.Is there an opportunity for growth in helium purification market that could become another area and growth driver for Xebec?

[Kurt Sorschak, Co]

I'll let you answer that, Mike -- Jim. Sure. Yes, absolutely. We have seen with our PSA technology, some significant interest from the market around us being able to purify helium. So we expect that over the course of the next year, we'll be adding some backlog coming from the helium market.

[Brandon Chow, Director of Investor Relations]

Thank you, Jim. We have another follow-up question from David.Can you comment on what you expect the margins to be in the second-generation Biostream production growth?

[Kurt Sorschak, Co]

Yes. If I look at, I would say, David, expect the margin to be in the double-digit area. It's early on, but we expect it to be solidly in the double digits as we come down the learning curve in our production and as we optimize our supply chain.

[Brandon Chow, Director of Investor Relations]

Thank you, Jim. We have a couple of viewers who ask some questions in regards to a potential U.S. listing. Could you give comments on maybe a ballpark schedule for that?

[Kurt Sorschak, Co]

Yes. And I've said this before, obviously, a U.S. listing would be very interesting going forward, especially as our revenues in the U.S. will significantly increase over the next couple of years. We are also looking to expand our manufacturing facility in the U.S. I think what we are looking at in the near-term is at our functional currency, which currently is still Canadian dollar. That will most likely switch at one point into us. And I think at that point, when we see sufficient investor pool for us to be listed in the U.S. that's when most likely, the management will make a recommendation board to look at the listing.

[Brandon Chow, Director of Investor Relations]

Thank you, Kurt. Our next question comes from Rupert Merer from National Bank.How competitive is the BGX Biostream in the market? And what market share do you think the BGX team can achieve?

[Dimitrios Vounassis, Chief Operating Officer]

I would start with it and Kurt, and then feel free to add. I would say that currently, what we're seeing with our second-generation product is that it's quite competitive in the marketplace. And really, the challenge of the marketplace right now is ramping up capacity and getting the products out to the customers as soon as possible. We would like to target and capture as much, honestly, of the marketplace as we can, and we firmly believe we have the right product to do it.

[Kurt Sorschak, Co]

Yes. I want to -- it's a very good question, Rupert. And it's not a straightforward answer here. I would say there are a couple of things that need to be considered. First, if the market is as large as we are saying 8,500 potential sites. And we have seen in Germany, when they introduced the renewable energy law, suddenly in '19 -- early 1990s, over the next 15 years, they had like 10,000 farm based biogas systems being developed. So it's not unreasonable to expect it price of RNG and with the incentives that we are seeing coming that we're going to see a significant increase in RNG projects in the U.S. The challenge will be, how are you going to fill that demand? If they are 8,500 sites and our capacity today is, let's say, 30 to 40, there's no way we're going to be a meaningful player. So one of the reasons why we are so focused on capacity expansion is because we anticipate that there's going to be a significant boom in RNG projects in the states, but we need more capacity. So we are looking to significantly expand capacity to be able to fill that potential demand. The second is what is unique about this Biostream unit, it's not only a price question for the system. When I look at what our competitors offer, they offer not complete systems, they offer basically individual components that the client needs to integrate or an EPC company needs to integrate. Our assistant is a complete it's a containerized system. You install it in 5 days. You started up in 3, days basically in 10 days, you are up and running. That's a huge difference to what the market is today. So especially, if we have done a good job on analyzing the market data and that Biostream will cover about 80% of the potential flow rates out there. This is a very attractive proposition because every day, you're going to be in operation earlier, you're going to generate cash. So I think -- as I said, yes, you can see now the straightforward answer, but a very exciting opportunity for us.

[Brandon Chow, Director of Investor Relations]

We have another follow-up question from Rupert.Can you give some color on your plans to invest in RNG infrastructure? What sort of projects are you looking at in terms of scale of feedstock and locations, since how long before you could have some in construction?

[Kurt Sorschak, Co]

Yes. So I mentioned that before as well. Our RNG infrastructure investments are now being bundled through GNR Quebec capital, which is an investment fund that is created together we say FSTQ and this fund currently has 24 projects under evaluation. And I expect that we're going to see some of those projects move forward this year. We have focused this GNR Quebec Capital on the Quebec market, and Quebec back market has some issues in relation to renewable natural gas, the gas, the price that developers can achieve for RNG here in Quebec is too low at the moment. So NSG, the local gas utility pays up to $23, and that is currently not enough to generate a sufficient IRR for investments. So you need to find, you really need to focus and find the right projects to be able to generate an IRR that is sufficient. And I think that slows down the development somewhat here in Quebec, but we are working with the government with energy to hopefully increase the price that they can pay. To give you an example, for this, we see base $30 now inflation adjusted. So it's already $31, $32 per gigajoule, a significant higher value than you would get in Quebec. But to come back, I think we going to see one or 2 projects move forward.

[Brandon Chow, Director of Investor Relations]

Thank you, Kurt. Our next question comes from Steve.Can you talk a bit more about the green hydrogen produced from RNG using HyGear's Technologies and the pipeline in that regard? And also its competitiveness to green hydrogen from wind, solar and hydro farms.

[Kurt Sorschak, Co]

So if I understood the question correctly, it's how green hydrogen out of biomass compares to green hydrogen out of electricity? It was that the question?

[Brandon Chow, Director of Investor Relations]

Yes, exactly.

[Kurt Sorschak, Co]

Yes. So this is an interesting question. And there are some market studies out there. I refer you to the McKinsey study, the 2019 study on the European road map to hydrogen, where McKinsey basically identified that 5% of the renewable hydrogen by 2025 by 2050, sorry, will be of the biogas because it is clear we're going to get rid of natural gas is a fossil fuel, and we're going to be shifting towards hydrogen, we will no longer be able to inject RNG into our pipeline because the pipeline is containing most likely hydrogen. So what McKinsey assumes is that this biogas will be converted into green hydrogen through Steam Methane reforming. And if you look at Xebec, we have all the technologies to do that. We have the technology to upgrade the biogas to RNG, and we have the technology with our container as Steam Methane Reforming systems to further reform its RNG into green hydrogen. Now that is a niche application. I think this is one of the niches Xebec is looking at in the future because I think we are well positioned to play there. The green hydrogen generation out of electricity through electrolysis is a future, I would say, opportunity. Today, electrolysis is 4 to 6x more expensive than hydrogen out of natural gas or out of RNG. RNG, obviously, you need to add the carbon credit is good. But today, electrolysis is not a competitive technology. That's why you are seeing when we are announcing projects with industrial partners, they are not asking us. We have the capability to provide electrolyzer installations, but they are not asking us for electrolyzer installations, they're asking us for Steam Methane Reforming installations because for them, cost is still a considerable factor. So I think as we move towards 2030, you're going to still see a significant deployment of SMRs. But maybe after 2030 going towards 2040, you're going to see more and more electrolyzer installations. But we are ready for that. We have both technologies, SMR and electrolyzer.

[Brandon Chow, Director of Investor Relations]

Thank you, Kurt. Our next questions come from Ahmad Shaath from Beacon Securities and Aaron Spychalla from Craig-Hallum.Are you able to comment and quantify amount of organic growth in the support segment?

[Kurt Sorschak, Co]

I'll let you take that to Jim, if you like.

[Dimitrios Vounassis, Chief Operating Officer]

I think the way you should look at our support segment, our Cleantech Services right now is it's a fast-growing segment. Today, we see that the majority, as was mentioned by Stephane and myself, the majority of the growth is coming from the acquisitions. The underlying companies themselves, as we look at them, they're continuing to grow, and we expect, over time, basically, we'll probably balance to more of a 50-50. But today, you can expect that most of the growth is coming from the acquisitions. I think Stephane, perhaps you may want to add a little bit more color there?

[Stephane Dephane Archambault, Chief Financial Officer]

Absolutely. Right. However, I mean, in our projections, we see these acquired companies to generate substantial organic growth as we introduce more product and more services. So we see that in the future that you will -- as Jim mentioned, we'll take more and more space into our growth profile.

[Dimitrios Vounassis, Chief Operating Officer]

Yes. Sorry. This is a unique opportunity for us, I would say, because we are also discovering as we acquire these companies and we bring them underneath the fold. There's a lot of synergy potential that's available there. From the purchasing and from standardizing some of our products and from offering our own internal services across the entire network.

[Kurt Sorschak, Co]

Yes. I would say, as we deploy more RNG and hydrogen systems, too. There's very few technicians out there who can actually service those types of equipment. So what we are experiencing is we are training our technicians within our service companies to be able to do RNG service now. Now it takes time. You need to have a program to train those people. But I anticipate, again, if we arrive, and this is going to be a significant market opportunity and that the market is going to grow, I think we're in a great position with our service network to service our own as well as our competitors' installations because nobody has a service strategy other than Xebec as far as I can see, and that will offer organic growth opportunities.

[Brandon Chow, Director of Investor Relations]

We have another question from Ahmad Shaath.Is the Q2 SG&A a good run rate going ahead? Or are we going to see further increases? If yes, what will be the driver behind additional SG&A increases?

[Stephane Dephane Archambault, Chief Financial Officer]

I can take that. So the SG&A, as we said, I mean, we are building our infrastructure, both on the operational side, but also on the SG&A side. So what -- besides for the acquisition that we're making, where we're going to add G&A, we foresee the core SG&A to stabilize in the coming months, in the coming quarters. So we may have a few additions here and there, but the majority will be stable going forward.

[Kurt Sorschak, Co]

Yes. I might add here what we are modeling is obviously a reduction of SG&A as a percentage of revenues, we need to put in a certain amount of infrastructure into the company, management capabilities, control systems. We are reporting ESG, all kinds of things that you're doing as a public entity. And as you grow your requirements increase, I would say, quite significantly, as we can see. But there comes a point when we have all those systems in there when we have all the ports deployed where we do not need to add incrementally as we grow. So what we are modeling, if I'm Jim and as we move forward over the next 5, 10 years, our SG&A as a percentage of revenue will significantly decrease.

[Brandon Chow, Director of Investor Relations]

Thank you, everyone. Our next question comes from Gene.Can you provide an update on the operations in China?

[Dimitrios Vounassis, Chief Operating Officer]

Yes. I'll take this. China, as we have stated before, we have this joint venture with Shenergy. Shenergy has transferred the investment from one of their investments bump into an operational entity. And that has resulted in us also increasing the participation of synergy. They now hold 35% of our joint venture. The employees have a 5% stake and we hold 60%. But we have agreed with Shenergy on equal board representation, which means we no longer control the entity because it's an independent board. And therefore, we have deconsolidated China from our financial statements. Now that doesn't mean we are not managing the entity. We are managing the entity, but the financials are no longer, so the revenue is no longer going into our consolidated amounts. Stephane, if you want to add something here, I don't know.

[Stephane Dephane Archambault, Chief Financial Officer]

You're absolutely right. I think that, that happened actually at the end of the quarter. So we deconsolidated all the results from China. And going forward, it will treat it as an investment.

[Dimitrios Vounassis, Chief Operating Officer]

But I can tell you, we are seeing good growth in China. There's obviously a lot of activity there. And it's also an interesting time in China for [indiscernible].

[Brandon Chow, Director of Investor Relations]

Thank you, everyone. Our next question comes from Aaron MacNeil of TD Securities.Can you provide a bit more detail on the decision to move Inmatec Systems segment? And will the Cleantech Service Network related revenues remain in the service segment?

[Kurt Sorschak, Co]

Yes. So on the Inmatec, why we included it into the Cleantech Service or Cleantech segment, it's basically because it's a renewable gas, oxygen and nitrogen be produced out of the air. So we take the surrounding the air and we separate the molecules. And therefore, it belongs into the Cleantech service -- in Cleantech segment. That's why we're [indiscernible]. What was the second part of your question, please?

[Brandon Chow, Director of Investor Relations]

Will the Cleantech Service [indiscernible] remain in the service segment?

[Kurt Sorschak, Co]

Yes, absolutely.

[Brandon Chow, Director of Investor Relations]

Great. Our next question comes from [indiscernible].Talk a bit more about the bidding environment for Biostream a announcement of the MSA generating incremental interest from other potential investment customers.

[Dimitrios Vounassis, Chief Operating Officer]

Sure. Maybe I'll take that. Certainly, what we see in the environment is that we have a lot of emerging players coming on to the scene, and our customers are really focusing on who can provide them the equipment and can provide basically on time and reliable start-ups. This is a big concern coming back from our customer base. Of course, for us, the win of the team is very has given us more credibility, along with the initial startups that we've done across the U.S. of our product. And we see now that we have interest from other developers who are talking and discussing with us both on the current second-generation Biostream and also opportunities that perhaps require smaller capacity units to attack a different animal winner of marketplaces such as flying fox. So it's certainly been a good validation of our capabilities and of our ability to perform there.

[Kurt Sorschak, Co]

Yes. I would add here, what we are also seeing is, you can see we received one order for 18 units. That also revies you to produce it in units, which is not straightforward. The whole industry and all of our competition basically produces 1 or 2, including us historically. We produced one, you got an order for one, maybe you've got an order for 2. Now we are getting order for 18. We have enquirers for multi-system orders. So it comes back to capacity. If this market, as I said, if this market is real. If we arrive, you need capacity, who is going to fill the capacity, We are all small companies, the opportunity is huge, but there are no manufacturers out there. So what Xebec is really setting up to do here now is get the capacity that if people come and say, I want to buy 20, I want to buy 50 over the next year, we can say, actually, we can deliver it and they believe it because it's one thing, and we have seen it. We've taken 12 orders in early 2020, late 2019, and we almost choked on those 12 orders because we couldn't push them out quick enough, and we had cost overruns. So it's very important that you scale up your manufacturing, that you have the capability and that you're credible in the marketplace. And that is what we are trying to do.

[Brandon Chow, Director of Investor Relations]

Thank you, Jim and Kurt. Our next question comes from Paul.In regards to the 18 Biostream units, were any service agreements attached to those hardware sales?

[Dimitrios Vounassis, Chief Operating Officer]

Yes. We are currently offering in the process actually of discussing service agreements for these 18 units. And I would expand by saying we have now a service agreement offering that we finalized with our Cleantech services network that will also be offering on all new bids that come in as well as going back to some of our existing customers and other customers, other products in the regions where we feel that we can provide the service and maintain them.

[Brandon Chow, Director of Investor Relations]

Thank you, Jim. Our next question comes from Steve.Is there any update on the CarbonQuest partnership?

[Dimitrios Vounassis, Chief Operating Officer]

Sure. I think recently, we had a meeting with CarbonQuest, and I could -- I can report that CarbonQuest continues to see success in their first facility, and we had a good discussion over future growth potential between the 2 of us, and we continue to believe really in this application of our PSA technology, which is really in carbon sequestration coming from large-scale residential or commercial buildings in large cities. The market seems to be there because we see a lot of incremental taxation pressure coming on to the owners of these buildings with regards to their emissions. So we expect to continue building the relationship with CarbonQuest, and we expect that over time, this unique application of our PSAs will continue to grow in the marketplace.

[Brandon Chow, Director of Investor Relations]

Thank you, Jim. Our next question comes from Sean Keaney from Eight Capital.When do you hope to complete the capacity for the expansion to 30 to 40 Biostream units?

[Dimitrios Vounassis, Chief Operating Officer]

Yes. We expect that by the end of Q3, we'll have completed basically the majority of the work that we need to do for the expansion for our 30 to 40 Biostreams as we hit the production we're running basically in Q4 to meter ramp up.

[Brandon Chow, Director of Investor Relations]

Thank you, Jim. Our last question for the day comes from David.In the RNG space, your competitors have a dedicated service that work to service all the operators?

[Dimitrios Vounassis, Chief Operating Officer]

No, I it. Yes. I would say that what we've seen so far from our competitors is along the lines of what Kurt discussed a little bit earlier. Really, the competition is more into the selling of subsystems, integration of subsystems and putting them out into the field. We have not seen any of our competitors to-date try to build a service network or go back and offer service type of contracts for their equipment. Yes and I add here, I consider the service network to be super important because if you sell a multimillion-dollar piece of equipment to your client, he wants to know that he is being supported. And this is what we are doing. It takes time to build that, but it will become a competitive advantage, and it will also become a source of recurring revenue. So I think we are doing the right thing. It takes time to build it. It takes money to build it, but we are well on it.

[Brandon Chow, Director of Investor Relations]

Well, thank you, everyone, for your questions. And unfortunately, this is all the time we have for today. And this wraps up today's webinar. With that, I'll turn it back to Kurt for his closing remarks.

[Kurt Sorschak, Co]

Yes. So I hope we could give you a good update as to where we are after Q2. We continue working hard on improving our bottom line. Our EBITDA numbers, I think the growth, you can see the growth, you can see the potential in the company, and I look forward to providing more updates in the next quarterly webinar. Thank you very much, and have a good day.

[Brandon Chow, Director of Investor Relations]

Well, everyone, that concludes our webinar. The details will be posted on our website shortly, and you may disconnect at any time. Thank you, and we look forward to seeing you again next time.

[Stephane Dephane Archambault, Chief Financial Officer]

Thank you.